Oil declined following a volatile week of trading after Ukraine’s president said talks with Moscow show signs of becoming more substantive, prompting some cautious optimism about steps toward deescalation.

Futures in New York fell more than 2% to trade below $ 107 a barrel after rising Friday. The war in Ukraine has roiled commodity markets from crude to grains, leading to buyers shunning Russian oil as they navigate sanctions, although some are considering workarounds. Senior American and Chinese officials meet Monday as the US seeks to enlist China to help end the invasion.

“Oil is pricing in the chances of a rapprochement, given some encouraging comments,” said Vandana Hari, the founder of Vanda Insights. “The tide began to turn in favor of talks and compromise in Moscow and Kyiv last week.”

There’s a flurry of diplomatic efforts to try and stop the war. A top adviser to Ukraine’s President Volodymyr Zelenskiy said “continuous” discussions with Russia are under way by video, while Russian President Vladimir Putin engaged with his French and German counterparts after they spoke with Zelenskiy. US Secretary of State Antony Blinken also spoke with Ukraine’s foreign minister.

That heralds the start of a jampacked week that will test whether Russia plans to repay its international debt and will likely see the Federal Reserve raise interest rates for the first time since 2018, potentially strengthening the dollar. A virus resurgence in China is also causing some concerns about oil demand.

The prospect of extra oil supply from Iran quickly alleviating a tight market was dashed on Friday. Tehran and world powers suspended talks to restore a nuclear deal after Russia sought US guarantees that sanctions imposed for its invasion would not affect its planned partnership with the OPEC producer. Iran carried out a missile strike in Iraq following the breakdown of negotiations.

  • West Texas Intermediate for April delivery lost 2.3% to $ 106.78 a barrel on the New York Mercantile Exchange at 12:20 pm Singapore time after dropping 5.5% last week.
  • Brent for May settlement slid 1.9% to $ 110.55 a barrel on the ICE Futures Europe exchange after rising around 3% on Friday.
    • The contract declined 4.6% last week.

Global benchmark Brent remains deep in backwardation, a bullish structure where near-dated contracts are more expensive than later-dated ones, signaling tight supply. The prompt timespread was $ 3.62 a barrel in backwardation, compared to $ 1.39 at the start of last month.

President Joe Biden’s top advisers have been working to increase pressure on China to enforce sanctions on Russia’s economy imposed by the US and its European and Asian allies. The White House said National Security Adviser Jake Sullivan will meet in Rome on Monday with China’s top diplomat, Communist Party Politburo member Yang Jiechi.

While Russia has been hit with harsh sanctions and the US has banned imports of its crude, funds to the nation may not be completely choked off yet. India is said to be working out a mechanism to facilitate trade using local currencies, while supertankers were still being booked to load Russian oil off Denmark. At least some ships will be for cargoes that traded prior to the invasion.

© 2022 Bloomberg

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